Single Family Production Poised To Take Off In 2015

October 31, 2014

A growing economy, rising household formations, low mortgage rates and pent-up demand will help single-family housing production to rev up in 2015, while a growth in renters will keep the multifamily market at cruising altitude or higher, according to economists who participated in yesterday's National Association of Home Builders (NAHB) 2014 Fall Construction Forecast Webinar.

"Single-family builders are feeling good.  They are not overly confident, but confident enough to keep moving forward," said NAHB Chief Economist David Crowe.

He added that the single-family sector will finish out the year much stronger than it began and set the stage for a robust 2015.

"This is mostly due to a significant pent-up demand and steady job and economic growth that will allow trade-up buyers who have delayed home purchases due to job insecurity to enter the marketplace," said Crowe.

A Bright Outlook

NAHB is forecasting 991,000 total housing starts in 2014, up 6.6 percent from 930,000 units last year.

Single-family production is expected to rise 2.5 percent this year to 637,000 units, increase an additional 26 percent next year to 802,000 and reach 1.1 million in 2016.

Multifamily starts, which Crowe said are now at a normal level of production, are projected to increase 15 percent in 2014 to 356,000 units and hold steady next year.

Meanwhile, the NAHB Remodeling Market Index, which averages ratings of current remodeling activity with indicators of future activity, matched its all-time high of 57 in the third quarter of 2014 and has been above 50 for six consecutive quarters.  A reading above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.

NAHB is forecasting that residential remodeling will post a 3.4 percent decline in 2014 over last year, due in large part to slow activity in the first quarter caused by an unusual harsh winter throughout much of the nation.  Residential remodeling activity is expected to rise 2.7 percent in 2015 and an additional 1.3 percent in 2016.

Housing Will Soon Be Undersupplied

Taking an even more bullish outlook, Mark Zandi, chief economist at Moody's Analytics, said that prospects are good for continued gains in overall economic and housing activity.

"The reason is that job growth is quite strong," said Zandi.  "Currently, we are creating about 225,000 jobs per month, or 2.75 million per year.  That is double the pace necessary to reduce unemployment and under employment, which augers very, very well for housing demand and the housing market more broadly."

With the current supply of housing running just over 1 million units on an annualized basis, Zandi said that this figure is well below what is needed for the longer run.

In the aftermath of the Great Recession, new household formations were depressed as the number of Millennials living with their parents or doubling or tripling up in apartments soared to about 3 to 4 million above normal, according to Zandi.  As the economy continues to improve and these 18-to-34 year-olds begin to form their own households, this will boost overall demand for new housing construction.

"In a normal year, there should be demand for 1.7 million units," he said, adding that each single-family home generates about 3.5 jobs over the course of a year and every multifamily unit produces 1.5 jobs over the same period.

Taking this one step further, Zandi said that increasing the housing stock by 700,000 units to meet this unmet demand would create 2.1 million jobs, which "would reduce unemployment by 1.5 percentage points."

By the end of 2017, Zandi expects mortgage rates to rise from their current rate of about 4 percent back to their "equilibrium" of 6 percent, which he noted would be very consistent with a solid job market and solid housing market.

"The housing market will be fine because of better employment, higher wages and solid economic growth, which will trump the effect of higher mortgage rates," he said.

He added that single-family starts could be closing in on 1 million units by the end of 2015 and multifamily production could go as high as 500,000 units.

Housing and Jobs Go Hand-in-Hand

Delving beneath the national numbers, Robert Denk, NAHB's assistant vice president for forecasting and analysis, noted the housing recovery will vary by state and region.

"We are getting back to the point where economic conditions are dictating the strength of local housing markets," said Denk.  "It is very clear that those states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets."

Energy-producing states - North Dakota, Texas, Louisiana, Montana and Wyoming - where job growth is strong are also at the forefront of the housing recovery while Iowa and other farm belt states supported by agricultural commodities are also running above the nationwide average.

Meanwhile, states such as Nevada, Arizona, New Mexico, Alabama, Rhode Island and New Jersey that are coping with weak labor markets are also struggling to get their housing activity back on track.

Housing nationwide bottomed out at an average of 27 percent of normal production in early 2009 and the gradual and steady housing recovery now underway across the land will bring nationwide single-family housing starts to 68 percent of normal by the fourth quarter of 2015 and 90 percent of normal by the end of 2016.

In another way of looking at the long road back to normal, by the end of 2016 the top 40 percent of states will be back to normal production levels, compared to the bottom 20 percent, which will still be below 75 percent.

Source:  National Association of Home Builders